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Health Insurance As A Tax

As required by the Affordable Care Act, since a few years ago, employers started reporting to the employees the total cost of their group health care coverage. As an employee, you are still not taxed on this value. The employer’s share of the premium is not taxable to you. Your share of the premium is usually deducted from your paychecks pre-tax. They just want to make you aware of the total cost. Some say it’s laying the groundwork for making it taxable one day. Maybe. For now we are not there yet.

The total cost of the group health care coverage through your employer is reported on your W-2, in box 12 with a code DD. It includes both the employer’s share and your share of the annual premium. The employer can choose to include only medical or they can choose to include medical plus dental and vision.

I looked at my W-2. The number reported in box 12 code DD was $12,800. When I asked payroll I was told the number was for medical only, not including dental and vision. That was for insuring employee plus spouse in a high deductible plan. My share of the annual premium from payroll deductions was $3,300, which was about 1/4 of the total. My employer paid the other 3/4.

What did I get from this insurance? I pulled a list of all the claims and the Explanation of Benefits for services during the year from the health insurance company. Here’s the breakdown:

Total Billed To Insurance: $2,350

Insurance Negotiated Rate Discount: $60

Total Paid By Insurance: $370

Applied to Deductible: $1,920

In other words, if we had no insurance and we just paid the list price from the health care providers, with no discount whatsoever for paying cash, it would’ve cost us $2,350 instead of $1,920. Having insurance saved us $430. For the privilege of saving $430, between my employer and myself, we paid $12,800 in premiums!

My employer paid 3/4 of the health insurance premium not out of the goodness of their heart. They paid it because I worked for them. It was part of my total compensation. It would’ve been a wash to my employer if they just put their share on my pay and then deducted 100% of the annual premium from my paychecks. Really, I paid that $12,800.

Insurance is for unexpected huge expenses. I know. I pay auto and home insurance every year and I rarely receive any payout. I paid life insurance all these years and I didn’t die. Health insurance is looking more and more like auto and home insurance and life insurance now, except it costs 10 times more. Another difference is in auto and home insurance and in life insurance, your premium is rated with your risk. If you have teenage drivers your auto insurance rate will be higher. If you’re addicted to illegal drugs your life insurance rate will be astronomical if they even insure you. In this sense health insurance isn’t true insurance. It’s more like a contribution for the greater good.

I can see why the Affordable Care Act marketplaces could only sign up people who get a subsidy or people who already require costly care. If you are healthy and you don’t get a subsidy, it’s very appealing to refuse to pay into the pool, saving that $12,800 every year. This is known as adverse selection. People who stand to benefit self-select into the pool.

Because all employees in the same plan at my employer pay the same premium, thousands of other healthy employees are all paying lofty premiums to cover the unlucky few who incur astronomical health care expenses. To a lower paid employee, the health insurance premium represents a large percentage of their pay. It works like a regressive tax: the lower your pay, the higher the percentage you pay for health insurance. Every person who gets health insurance through their employer already pays this tax.

I once entertained the idea of taking a job in Europe. When I looked at how income taxes worked in that country, I was shocked to see their tax rate started at 36% on the first dollar/Euro earned and it went up to 52% on income over about $70k. Such rates appear punishingly high, but when you add our federal, state, Social Security and Medicare taxes plus health insurance, here in the U.S. we are actually paying not that much less.

If you get health insurance through your employer, I encourage you to go through the same exercise. Look at your W-2, box 12, code DD. See how much you are paying for health insurance. Translate it into a tax rate. Add it to your federal and state income taxes and payroll taxes (include the portion paid by the employer because that’s part of your total compensation too). You might see the total approaching the levels in Europe. We are only kidding ourselves in saying we don’t want high taxes as in Europe when we are already paying rates just as high.

It finally dawned on me that employer-based health insurance is single-payer universal health care, only within that employer’s walls. The single payer is the employer. Every employee who wants health insurance is covered. There is no exclusion for pre-existing conditions. Every employee pays the same for the same coverage regardless of age or health status (some employers set the employee contributions lower for lower paid employees). It’s funded by a “tax” on all employees in that a part of your total compensation is automatically withheld from you. The younger and the more healthy employees subsidize the older and the less healthy employees. Those who are against single-payer universal health care actually already have it!

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Comments

Yeah, the whole healthcare issue is still pretty messed up. Argh. I’m a contractor, which means I don’t get benefits. However! In lieu of benefits I get higher pay to make up for it. Since Mr. Picky Pincher gets benefits through his job, we bank all of my pay. We’d still have health insurance even if it weren’t legally required. The ACA laws do have a lot of messy implications for taxes, though, and I know it’s not a perfect system. I’m both scared and intrigued to see if it gets replaced.

It looks like you are calling the ‘insurance discount’ the amount off list price that the insurance company has negotiated with the provider/service/hospital/clinic.

That *should* be correct but I’m skeptical. I would be intrigued to know if a call or two to the billers asking for uninsured, out of pocket prices for a couple of your bills substantiates your impressions.

As an aside, I agree that $12k for a HD plan sounds really high. I’ve wondered more than once if people should not consider taking the benefit as cash and then go shopping on their own for a plan but the tax deduction would be lost, the employer would have to pay SS and medicare taxes, and the people who remain in the group plan would see their rates increase as their mini-pool becomes more heavily weighted towards unhealthy employees. All this explains in part why employers do not offer the option.

It appears to be the nature of people to limit their perspective to their own pocket but the naked truth is that poor lifestyle choices like alcohol abuse, tobacco, obesity and its sequelae are horribly expensive and no matter how insurance is arranged, that will be true.

The “insurance discount” is strictly off the EOBs, as the difference between the billed amount and the negotiated rate. I suspect the cash rate would be lower. Therefore the $430 savings from having insurance is likely too generous. Basically the employer is operating like a mini nation with public health care funded by a tax on all employees.

Harry
I am not clear what you are asking for. You want the pre-tax premium in your pay so you can shop for a plan of your choice (assuming you opt for less restrictive, more limited coverage), an escape of taxation akin to European-style systems, and to take on the financial risks of the lesser policy you purchase in the event of a health shock?

That’s not a knock. I am trying to understand the tradeoffs you are putting forth.
Brad

I’m not asking for anything. I’m only raising awareness of what’s really happening. We have to first understand what’s happening before we evaluate any solutions. It can be returning health insurance to true insurance, having it underwritten by the individuals’ risks, but that can leave unhealthy less affluent people without care. Or it can be realizing it’s like a tax anyway, only in many separate employer pools, so just formalize it into a tax. At least it will be progressive. Or a combination, a tax that covers the catastrophe and individual policies for the office visits and labs.

I love this article. Thank you for distilling your thoughts so lucidly. I have been trying hard to get my no-tax republican and healthcare -for-all democrat friends to understand this issue in one simple understandable way. Both sides refuse to acknowledge the reality. I think making it a (progressive instead of flat) payroll tax (with both employer and employee contributing) with no wage limit would make it far less conspicuous and affordable for all. But the flip side is nobody would care about what healthcare truly costs and that would be self-defeating. May be make first $x per family individual responsibility. Argh. No easy answers.

Better design may be:
1. Catastrophic individual coverage above $40,000 say – Part A premium (mandatory – progressive payroll tax with no wage limit for this)
2. Combination of deductible and coinsurance to cover costs under $40,000 Part B premium (optional) ACA can impose out of pocket max here. Private insurance can be had here. If you do not choose Part B, provide government with a bond that shows you can bear this cost.

Harry
I agree with you on the assessment that we rant and rave about EU taxes and “socialized medicine,” but then we pay almost as much, and get mediocre “industrialized medicine” provided by the “free market.” How can anyone pretend that there is a free market for healthcare? Doctors don’t have any idea how much the things they prescribe–procedures, tests, or drugs–cost. Do we tell our PCP’s to shop around when it’s time for a colonoscopy, or a stress test?
As for discounts from the famous chargemaster lists that Steven Brill revealed so well in his Time article a few years back, the classic defense from hospitals is “Well nobody pays that!” I just had a Vitamin D test as part of my annual physical: List price $344, discount -$309.71 (-90%), insurance paid $30.86, I paid $3.43 (1% !!!). Why is there a need to have a list price that is then discounted by 90%? Imagine if you went to buy a Honda Accord and the list price was $350,000, but because you paid an annual membership fee to some organization, your price was $35,000. Healthcare is obviously not a market where real numbers matter–unless you are uninsured, and then you get a bill for $344 for your Vitamin D test. Unreal.

I’m not aware of anyone who claims there is a free market for healthcare.
I am aware of many who wish there was and claim that costs would be dramatically lower for routine care(office visits, basic labs/tests) if there were. This would require insurance to not exist for these things. Then an OV would cost $50(out of pocket, cash on table at time of service) instead of being charged $90 and insurance and you(via co-pay) ultimately paying $65 which because of all the costs in getting that $65 actually leaves the doctor actually only getting $23.

JustADoc – The pet health care market is close to a free market. Only a small percentage of pets are insured. People pay cash out of pocket for the most part. The big difference, however, is pets with too-expensive-to-treat problems are often put down. We don’t do that to humans. Therefore it’s easy to have a free market for office visits and lab tests but for expensive health problems, the young and healthy will always subsidize the old and sick. The subsidy just comes in different forms: expensive health care premiums (a big part forced upon them behind their backs), ridiculous costs on Vitamin D, taxes, or all of the above.

I once worked in HR for a company that had a sliding scale. The higher your salary, the more you paid for the company-sponsored health insurance. IOW, the company subsidized more of the cost for lower paid employees and less of the cost for higher paid employees.

I didn’t read comments yet, but this is a great article showing people who care to read and think that there’s hardly any difference between the socialism and capitalism. I think it’s just a trick they use in the USA to fool people. As long as a word ‘tax’ is omitted from any new deductions, fees, surcharges or whatever you want to call, then yay, we’re in a capitalism though the costs, percentages are very comparable to Canada and Europe. The quality of care is said to be even sometimes better outside the USA. At least people save some sanity there not arguing with insurance agencies what they should pay providers but reluctant to do. I also think it’s crazy that gov’t cannot negotiate drug prices like VA can do for veterans, but hey, maybe Mr.T will manage to rock that boat.
OTOH, when you talk to Europeans they complain that sometimes the quality is not great there and say “at least your taxes are not as high in the USA as they’re here”. Then I attempt to explain how much we pay for medical insurance and almost get sick dealing with insurance companies and providers to get the bills paid. Again, since it’s not called ‘tax’, they think it’s better here. So, that magic word has a very strong subliminal effect on both sides of the pond.

So, I’m now changing jobs and as such, my FSA expires so I lose out on that money. Money I can use to pay the amount I owe on the bills that I have been waiting on for four months. But now I’m talking to the guy on the phone, my fourth phone call this morning mind you. So, I call insurance, they can’t help me so i have to call the provider. So I call the provider and learn that since I am a resident I am not responsible for the amount that I’m told that I owe.

But, I have yet to see the bill from the hospital, so I call the hospital to find out that they billed my insurance in December. So, back on the phone with the insurance, to find out they have no records of the incident on my policy number.

So, now I’m back on the phone with the hospital to try to verify that they billed the proper insurance policy. Well, they billed the wrong insurance and the information they had on file is not my insurance information. I’ll say this is the 3rd, 3rd?!?!!, this has happened to me. I’ve had them bill an insurance that I don’t have, and then had them type in the wrong address. So this time, they had the right provider, but wrong insurance policy information. So, now I am going to have to wait on them to get the information to the insurance company.

So, I’ll have to figure out what’s going on. And now I have to wait to get confirmation on whether or not I can use it.

So, not only is it expensive as all hell… why is it so DAMN COMPLICATED?????? I would gladly pay increased taxes to not have to deal with this, and not have to deal with worrying about where my insurance is coming from after leaving a job… and transitioning doctors and fighting with billing departments and cleaning up their mess. Why do I have to deal with this, when I am the one that got run over by a car while on a bicycle?

So I’ll follow up later today to see if the bill went through properly so that I can see if I can pay it. This is complete insanity.

If it were simply a matter of paying a little extra (taxes or fees) to get better service, I would agree that would be a good way to go.

Unfortunately, we have this problem because we have the wrong incentives in place. Patients expect their costs to be covered, with little or no out of pocket and with insurance at “affordable” rates. Insurance companies seek to control their costs and avoid competition. And politicians perpetually seek to maintain and expand their own influence.

Bottom line, we have this mess because government inserted itself in our insurance needs. The reason we generally buy insurance thru a plan arranged by our employer is that WWII era price controls encouraged employers to find ways to aid recruitment. Insurance purchased by the company and given as a benefit to employees skirted the ‘no wage increases’ rules at the time. The IRS decision not to see that as taxable income (I don’t believe this was ever handled decisively by Congress) creates inertia.

Layer on top of that the ridiculous regulation of insurance selling across state lines that limits competition (to the point that most Americans have many fewer vendors to choose among than do Europeans), and you get a dysfunctional system where costs are too high and customer service suffers.

All of this in the arena of healthcare decisions – which are made by patient and doctor (neither of whom are totally aware of costs until after the fact).

So, excess government involvement got us here, and the ACA did not improve the situation. Instead, competition was further eroded and another layer of complexity added to create subsidies.

The simple and effective answer is too scary for most to contemplate: Let insurance companies compete across state lines, eliminate insurance subsidies (let’s talk about increasing the earned income credit if you want to help pay the working poor), and watch the public shun insurance companies that don’t step up.

This is a great article! If I recall correctly, I believe this is much the same point that Bernie Sanders made in the 2016 presidential election campaign when he proposed to raise taxes in order to pay for a single payer healthcare system, asserting that the reduction in premiums would be greater than the increase in taxes. It seemed like the framework of a good plan to me.

The employer-employee split is not material. It’s only psychological how much you are paying out of your paychecks versus how much your employer didn’t add to your paychecks in the first place and used that money to pay for health insurance. Charging a lower contribution from lower paid employees just means the employer withheld more of the total compensation from the lower paid employees to begin with. When you look at the total cost on your W-2 box 12 code DD between two employees in the same plan at the same coverage level, it’s all the same.

I read somewhere that on average a working man visits the doctor once in four years and a woman visits once in two years. If these numbers are true, then the insurance companies are making out like bandits.

Many health insurance companies are publicly traded. You can look up their profit margins. Most large employers such as mine are self-insured. The insurance company only processes the paperwork. The employer ultimately pays all claims plus an administrative cost.

Basically a small percentage of people predictably incur a large amount of expenses. If they are rated based on their own risk, they will not be able to buy insurance — it’s too obvious when you have certain chronic illness your health care expenses will be high. But we don’t want to leave them without care, therefore everyone else must pitch in $10k to help them. The employer “forces” the more healthy employees to cover the less healthy employees. It runs a mini universal health care among its own employees.

So there is a competitive advantage to the company in self-insuring.
The company must think that its workers are healthier or can be made healthier than society at large. This is probably true since its workers are younger, better educated and healthier.
i.e. its pool is lower risk than a more universal pool. Since the company pays the premiums to itself but accounts for them as cost, it saves on taxes as well. Pretty clever.

As more and more companies do this, the non self-insured pools like ACA will become higher and higher risk with increasing premiums.

If a large company doesn’t self-insure, it’s still going to be experience rated by the insurance companies. If the company’s employees are older and not as healthy as the public at large, it’s going to pay more regardless. GM was once joked as a health care company with a car business attached.

I think the biggest problem with medical insurance is that medical services are just too expensive. Slice it up how you want, but in the end – costs are out of control. Then add a 100 million dollar CEO to the mix (e.g., Michigan blue cross) and the formula doesn’t get much better.

In my situation, back in the day – 20 years ago or so – we had a small group policy though an association. We shopped a lot. At some point 10 or so years ago, it was cheaper to go with indivual policies – even considering the tax break for the business. It made no sense to me, but we shopped it. Along the way most of my employees ended up with spouses with coverage. So we ended up just adding a chunk to everyone’s compensation formula. Sort of what Harry envisions. They can buy an indivual policy themselves or just keep the money.

On the discount, I’ve seen a lot more. In 2009 I messed up my ankle pretty bad in a ski accident. The MRI was billed at $2,700. The negotiated rate was $600. That is just sickening to me. In another more recent issue, the cash rate was the full rate. Doesn’t make sense, but that is how it was. To me, part of the value of a plan is the steep negotiated rates.

Then when the ACA came out, we somehow got a rebate of $500 or so one year. There is a provision that 90% or so of the premiums are spent on actual medical issues. I guess the insurance companies now get around this by investing in real estate, then doing complex lease backs. Another read for sure. Sickening to me again. Likely the 100m guys cooked this up. Sounds like a scam, but I guess it is legal. That is what you get without oversight.

Also, there was one odd year before complainant policies were available that was interesting – the gap year. I think 2015. We had a family policy with a $20,000 deductible. It was $225 or so per month. But the ACA says that is too high, and fears employers are going to push those policies on employees, so the cap is $13,500 or so. So lowering the total deducible, and adding the bullets increases that to $700. Ouch! The $225 is really what everyone is looking for – I think. You still get coverage over that for catastrophic events, and you get the negotiated rates on what you use. But it was a gap. I’m not sure it would even have existed if there wasn’t a transition to the ACA. That is what they can do – if they want.

If only it was that simple. I have two figures for you to consider:
1. About 20% of medical services revenue is spent on administration.
2. I worked in a University hospital for a couple years in good ‘ole days before ACA. A full 30% of all patient bills were written off as unrecoverable. These were the people that were not insured and refused/could_not pay for the emergency services rendered.

I’m not sure what part was simple. It all seems pretty complicated. The part that seems like water finding it’s level is that medical care is very expensive, doctors charge a lot, and MBA types find a way to get their cut. If you want simple, just buy an old school no deductible plan. In 2014 in Michigan, those were $22,000 per year.

I tracked down a couple medical EOBs out of curiosity regarding the negotiated discount between my provider and a hospital based radiologist and anesthesiologist. One EOB showed a 10% discount while the second one was 30%. I have no idea what an average might be but I have a strong feeling that discounts are greater when it comes to inpatient services.

And therein lies the rub. When you are healthy and only visit your PCP for minor issues infrequently, the premiums look outright outrageous. Cop a surgery though, and you will be mighty glad for the insurance.

If you want something to complain about that *truly* is a travesty and in my opinion fraud, look into out-of-network charges from in-network hospitals. Those cases involve double billing because the hospital DRG includes coverage to the in-network providers … and an additional bill if the provider is out-of-network.

Harry, what do think of insurance companies wanting the exorbitant rack rate on the EOBs to convince people about necessity of insurance? What would happen if a law mandating medicare reimbursement rate to be put in there was passed? May be, Austin Frakt can tell us more about this?

How would cost uniformity and cost transparency as a policy goal be achieved? How would the political will be swayed towards this?

@KD said “What would happen if a law mandating medicare reimbursement rate to be put in there was passed? ”

Medicare reimbursement “works” because other people like Harry pay a whole lot more into the system. If you want to see examples of what happens when everybody pays low rates determined by the government, look at Russia’s healthcare system.

The Euro model seems ok for low to middle incomes but taxing high incomes at 50% to account for services doesn’t scale. It has seemed to me that there ought to be a progressive system that modestly drops the tax rates as the income increases. High earners often complain there is less incentive to make an extra dollar when half of it goes to taxes. Why not flip that on it’s head so that as you increase you keep more of each dollar. I think the motivation would alight the government and individual’s interests.

Harry,
You mentioned the expenses “…are nearer t0 50%…” in reference to total HealthCare expenses paid for by employer or employee.
It gets even worse if you look at your Schedule A Deductions, specifically where you list total Medical deductions. Pre-Obamacare, you had a minimum threshold of 7.5% of AGI that if you exceeded that threshold would become part of the Medical Expense detail deductible. Now, with Obamacare that threshold was increased to 10% of AGI which means that you pay for Obamacare for others with this middle-class income gimmick that they stuck in the tax code. Check it out for yourself and you’ll see that it costs individuals hundreds of dollars to support Obamacare on our tax returns now and it was just kind of slipped in there. Only self-preparers of tax returns would even see or understand it.

How true this article is. Unfortunately, politicians don’t seem to understand real issues and are driven by ideological divide. Healthcare is one of the biggest ideological disagreements between the two parties. Ideologically Republicans have always believed that healthcare is not a government issue. The national government should not be involved. Healthy people should take care of themselves and weak should be helped by charities and possibly states, but not by the national government.

ACA showed a better model than what we previously had but it is not perfect. Recent events showed that in seven years, while badmouthing Obamacare=ACA, Republicans could not come up with a better model. They failed to repeal it because it makes sense. Repealing it would affect their constituency. The most recently failed Republican healthcare bill was a fix, not the repeal. Essentially they left ACA but changed the funding of it. That was not enough for the so called the freedom caucus, because they refuse to understand the reality and are still driven by ideology.

Recently my wife and I traveled to Australia. They had an election, showing a political ad on TV – “Don’t let this liberal change our excellent national healthcare system. We don’t want it to be as messy as American.” Obviously, that ad was run by a conservative party. My wife and I started laughing. That shows you how relative the liberal and conservative issues are. The parties try to differentiate themselves and could be strongly for something they were strongly against years ago. The trick is to leave ideology out, being objective and pragmatic.

The notion of us having freedom to choose a doctor is misleading and we often have to change doctors, when changing our insurances. For profit insurance companies are in the middle between you and your doctor. With this model they will always try to pay less to your doctor and charge you more for your policy.

I totally agree with Harry. In some replies I see the discussion of how to tax people for healthcare. Lets not go there for now because “Where is the will, there is the way.” Most important is to have a smart government, which we do not currently have. Smart enough to understand issues and to come up with just enough taxes to cover expenses of healthcare. Not more, not less. I am sure economists could come up with a fair model in no time.

I am old enough to be on Medicare and am perfectly content with it. Contrary to what many believe, it is not free. Not only I pay to the government for it but I also pay for a private insurance covering gaps. Analyzing experiences of other advanced countries, Medicare is a perfect example of having PRIVATE quality healthcare paid by GOVERNMENT controlled funding system. Think of a positive affect on economy when businesses and especially small business do not have to deal with healthcare insurances.

Life is too short. We are trading the illusion of freedom on wasting so much of our precious time on extremely complicated healthcare system… “Nobody knew it is so complicated…” …and that also goes for our overly complicated tax system .

Great post and responses.
Harry writes: `The employer-employee split is not material. It’s only psychological’
The same thing can be said about social security tax `split’ between employer and employee.

That one is particularly interesting when you are self employed with a single employee and paying both the employer and employee portion which is also true when paying for your healthcare. There is no employer/employee split except logically. The same person, “me” is paying both.

Great article and some nice critical thinking into how to think about health care as it exists today in the US. I was back home in Ireland a few weeks ago and talked with my siblings about how health care works there given that I left quite some time ago. I had never heard of the Universal Surcharge but they pay just as much as we do if not more for health care given the high tax rates. Its more a case of stealth through taxes versus the out of pocket payments we make here which impact us much more from a psychological perspective in my opinion.

I have 2 siblings working for Amazon who would fall into the higher categories. Amazon also pays 1800 euros a year for private insurance and I don’t remember how much they pay. Check out the following and it should be apparent to everyone that regardless of the system used to pay for healthcare, you pay for healthcare: The Universal Surcharge is above and beyond PAYE tax. As an example: A single person in Ireland would pay 20% tax on the first 34,500 euros and 40% on any balance higher than that. Lets assume a single person making 100k Euros, PAYE tax would be would be 6900 (20%), 26,200 (40%) and then add the 8% surcharge (look below) which is another 8k euros. That’s 41,100 euros or an effective rate of 41% before we start talking about VAT (value added tax – equivalent to sales tax) of 23% or 13.5% depending on the good/product/service, administration fees on building houses (these are ridiculous and can be as much as 10-15% of the value of the home you are building ), car tax, tv licences, 12 cents stamp duty on every ATM withdrawal, Annual stamp duty of 30 euros on credit cards per card. These are all in addition to that 41% effective tax.

I rambled a bit but the point is that they are paying for the health care they have and that we as a society need to be prepared for the sticker shock that comes with doing so.

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